BEFORE THE CALIFORNIA STATE BOARD OF EQUALIZATION
5901 Green Valley Circle, Room 207
Culver City, California
REPORTER'S TRANSCRIPT
FEBRUARY 25, 2009
ITEM B4
FRANCHISE AND PERSONAL INCOME TAX HEARING
APPEAL OF
NASSCO HOLDINGS, INC.
(No. 317434)
AGAINST PROPOSED ASSESSMENT OF
ADDITIONAL TAX
Reported by: Beverly D. Toms
CSR No. 1662
1
1
2 P R E S E N T
3 For the Board Betty T. Yee
of Equalization: Chairwoman
4
Judy Chu
5 Vice-Chair
6 Bill Leonard
Member
7
Michelle Steel
8 Member
9 Marcy Jo Mandel
Appearing for John Chiang
10 State Controller (per
Government Code
11 Section 7.9)
12 Diane Olson
Chief, Board
13 Proceedings Division
14
For Board of Amy Kelly
15 Equalization Staff: Staff Counsel
16
17 For Franchise Tax William Gardner
Board: Tax Counsel
18
19 For Appellant: Jon A. Sperring
Representative
20
Gail A. Morse
21 Representative
22 James B. Euphrat
Representative
23
24 ---oOo---
25
26
27
28
2
1 Culver City, California
2 February 25, 2009
3 ---oOo---
4 MS. OLSON: Our next item on the agenda is B4,
5 Nassco Holdings, Inc.
6 MS. YEE: Okay.
7 Appeals, why don't we introduce the case.
8 MS. KELLY: Madam Chair, the issue in this
9 appeal is whether Appellant may use its enterprise zone
10 credits and other credits to reduce its alternative
11 minimum tax liability for the appeal years.
12 MS. YEE: Very well. Thank you very much. Do
13 you need the exhibits up before you start?
14 MR. SPERRING: Yeah.
15 MS. YEE: Okay. Wait a couple minutes. That's
16 okay.
17 MS. MORSE: I'll try to go fast. Try to get
18 them up here.
19 MS. YEE: Okay. Very well, good morning.
20 MR. SPERRING: Good morning, Madam Chairwoman
21 and Honorable Board Members. For the record, I'm Jon
22 Sperring with PriceWaterhouse Coopers. And with me
23 today is Nassco's outside counsel, Ms. Gail Morse from
24 Jenner Block; and Mr. James Euphrat, Nassco's Tax
25 Manager.
26 The appeal before you centers around the
27 definition of tax in 23036(d)(1). More specifically,
28 whether the enterprise zone hiring credits offset the
3
1 alternative minimum tax.
2 Our position is that the term "tax" in (d)(1)
3 includes the AMT and therefore the AMT is part of the
4 tax that may be offset by enterprise zone credits.
5 Tax is defined in 23036 and we believe you have
6 to give the term its full meaning as laid out in
7 paragraphs "a" and "b". We believe "a" and "b" are
8 cumulative and not disjunctive.
9 Our reading gives every term in 23036 a
10 meaning. The California Court of Appeals reads the term
11 "tax" the same way. In Chen the Court said that 23036
12 defines tax as the alternative minimum tax.
13 We are making this case because Nassco filed
14 its returns consistent with this reading of the statute.
15 The statute is clear and we don't think you need to go
16 any further. But we also think our reading of the
17 statute is consistent with the legislative history.
18 In 1993 the Legislature passed and the Governor
19 signed AB 57 by Willie Brown. It should be noted that
20 the legislation did not receive a single no vote. AB 57
21 added enterprise zone credits to the list of credits
22 found in 23036(d)(1), which may offset tax, in quotes,
23 below the tentative minimum tax.
24 The legislative history makes clear that the
25 purpose of this bill was to allow credits to offset the
26 AMT.
27 The first point we would like to focus on is
28 the Legislative Counsel's digest. We note the digest is
4
1 consistent in every iteration of the bill as it worked
2 its way through the Legislature. And if you notice, the
3 digest says very clearly that -- that this would
4 additionally allow those credits to reduce the
5 alternative minimum tax.
6 Second we point to the Senate Rev. and Tax
7 Committee analysis of AB 57 drafted by Martin Helmke.
8 The committee analysis states that the bill would
9 authorize use of the credit against either the regular
10 tax or the AMT.
11 These two statements are fully consistent with
12 over 18 other documents in the legislative file. These
13 documents list three taxpayers supporting the bill.
14 Taco Bell. Unity Forest Products. And Nassco.
15 And the person following the legislation and
16 actively supporting the bill for Nassco was Jim Euphrat,
17 who I introduced earlier.
18 Jim, please tell us a little bit about your
19 background and the legislation.
20 MR. EUPHRAT: Good morning. Well, my
21 background is I've been at Nassco since October 1979.
22 So coming up on 30 years here.
23 I'm the Tax -- Tax Manager for the company.
24 I'm a C.P.A., and so my role at the company is very much
25 focused on taxation issues.
26 And one part of my background, just of -- of
27 some relevance, is that I was a participant in a San
28 Diego Enterprise Zone Steering Committee that was a
5
1 community-based group really sponsored by the City of
2 San Diego Enterprise Zone Group, which is a group
3 responsible for promoting business activities and growth
4 in terms of jobs for the San Diego region. Specifically
5 for the enterprise zone.
6 And the -- jumping to 1986, the enterprise zone
7 law first came into being and we were invited to
8 participate. We had meetings with the -- including the
9 Franchise Tax Board, the City of San Diego, the
10 California Trade and Commerce groups. They -- they had
11 kind of a promotional series of meetings that -- that
12 were very encouraging in terms of this program being
13 available to help businesses, particularly those that
14 might be struggling in terms of hiring and -- and
15 growth.
16 And the -- and it was very relevant for Nassco
17 at the time because in 1987 and '88 we were going
18 through a very significant layoff period because of some
19 lack of -- of government contracts or contracts in
20 general for building the ships compared to what our
21 historical level of activity had been.
22 Very significantly to the company in -- in
23 1989, our former parent company, Morris and Knudsen,
24 threatened to close the doors because they were also
25 experiencing financial challenges as was Nassco, itself.
26 So, they didn't feel they could sustain the
27 business. And so, we came very close to shutting the
28 doors. We were able to negotiate a -- an employee
6
1 purchase, essentially, of the company. So, in April of
2 1989 there was an ESOP that was formed to manage the
3 business. And the ESOP included participation of all
4 the employees, union and salaried employees alike.
5 But the business was continuing to struggle
6 financially through the years that are at issue here.
7 The first year at issue here is 1994, and it was
8 probably 1995-96 when the company really started to turn
9 around, started going into a bit of an uptake in
10 terms -- terms of jobs growth and -- and so forth.
11 And 1993 is -- is very relevant in terms of the
12 issue here because that's when -- well, there was a
13 predecessor bill, Assembly Bill 1015 and then there was
14 Assembly Bill 57 that we've spoken to already that --
15 that were on the -- the horizon.
16 Now, we -- we were very much aware of the
17 legislation and excited about it because we were in
18 the -- in the need for additional help in terms of
19 keeping the company viable and keeping the jobs in
20 place. And -- and so, we were following this very
21 closely.
22 We retained a lobbyist, the firm Houston and
23 Tournis (phonetic) that -- that was monitoring and
24 helping -- helping to shepard this through the
25 legislative process. And then we also -- I also
26 personally contacted a variety of trade organizations,
27 specifically Cal-Tax, the California Manufacturers
28 Association.
7
1 I also was contacted in a favorable sense by
2 the California Trade and Commerce Group and -- and had
3 numerous discussions with them.
4 Also again with the City of San Diego
5 Enterprise Zone Group. And all -- all of these groups
6 that I was speaking with were very supportive of our
7 efforts in terms of trying to -- to get this through
8 so -- and it's -- it's worth noting, you know, why --
9 why I was interested in particular just because of some
10 fairly unique aspects of -- of Nassco. We -- we tend to
11 be mostly in an alternative minimum tax situation.
12 Partly is because of some long-term contract
13 rules under Code Section 460 that are basically timing
14 in nature and force, and as a part of the adjustment
15 between regular tax and AMT can be quite large. And so,
16 it forces us to be -- to an AMT mode. Also because it's
17 a capital intensive type industry. So, when we do
18 purchase new equipment then the -- the depreciation
19 differential between regular tax and AMT also is an
20 adjustment item. That's just the way the AMT works.
21 So it's relatively routine types of situations
22 that were causing us to be an AMT. So, we were very
23 sensitive to that to make the credits real and
24 significant in the way that the FTB -- and the Commerce
25 Department had talked about these programs as being a
26 good incentive for jobs and such.
27 This was -- this was something I was very
28 excited about and -- and pursued closely. I also wrote
8
1 numerous letters in -- in support of the legislation to
2 the -- to the delegation that was involved with it. I
3 had -- I had several meetings with the -- in particular
4 the San Diego delegation of -- of legislators, and they
5 were all expressing support for what we were trying to
6 accomplish at the time.
7 And I think it's -- it's worth noting, at least
8 from my perspective, that all of the groups -- groups
9 involved at the time very clearly understood the purpose
10 of this legislation was to offset the alternative
11 minimum tax.
12 So that was -- you know, I can -- that's from
13 my personal discussions and recollection and as well as
14 it's supported by the documents that were -- you know,
15 in -- in this packet here. A lot -- they're -- they're
16 all consistent from my viewpoint in that regard. MR.
17 SPERRING: Thank you. Thank you, Jim.
18 Clearly the Legislature understood that a
19 narrow subset of taxpayers were unable to avail
20 themselves of the enterprise zone credits. These were
21 AMT taxpayers in enterprise zones. To quote the author
22 of the legislation in his bill to the Governor urging
23 him to sign it, he said, "This legislation was to
24 benefit taxpayers subject to the AMT."
25 However, the FTB reads the statute to benefit
26 all taxpayers not subject to the AMT. In other words,
27 they deny the benefit to the very taxpayers that the
28 legislation was designed to help.
9
1 MS. YEE: Thank you very much. You'll have
2 five minutes on rebuttal.
3 Franchise Tax Board.
4 MR. GARDNER: Good morning, Members of the
5 Board. My name is Bill Gardner. I'm representing the
6 Franchise Tax Board in this matter.
7 Sitting beside me is Terry Collins, also Tax
8 Counsel with the Franchise Tax Board.
9 As stated, the issue in this case is whether
10 the Appellant may use enterprise zone tax credits to
11 offset its AMT liability.
12 The short answer to this question is no. And
13 the reason they cannot is because the -- first, that the
14 plain language of the statute clearly provides that
15 these credits are not available to offset AMT
16 liabilities.
17 We can see that because in the credit statutes,
18 themselves, the credit statutes for these enterprise
19 zone credits state they are available against tax under
20 23036. They do not state they are available against the
21 AMT liability defined under Section 23400 of the Rev.
22 and Tax Code.
23 Tax as defined under 23036 for this taxpayer
24 would be found under Subdivision "a" of that section.
25 And it states that it would include corporate income and
26 corporation franchise taxes. There are a couple other
27 taxes under Subdivision "a" but this taxpayer is neither
28 an exempt or -- or an "S" Corp. so I'm going to not talk
10
1 about those ones.
2 They do not -- under Subdivision "a", AMT is
3 not listed. There are items under Subdivision "b" which
4 would expand the definition of tax. However, those
5 items are only available in very limited circumstances
6 and are listed within Subdivision "b."
7 The enterprise zone credits are not among those
8 references under Subdivision "b" and therefore there is
9 no expansion under subdivision "b" with respect to the
10 definition of tax.
11 Thus we only look to the definition of tax
12 under Subdivision "a", which only includes the
13 corporation income and corporate franchise tax for this
14 taxpayer.
15 Now, Appellant's position is premised upon a
16 misreading of 23036 and the definition of tax. It is
17 also -- they also have a misstatement on what
18 Subdivision (d)(1) does.
19 The current structure of 23036 was enacted back
20 in 1988, prior to AB 57 in SB 1801. What SB 1801 did
21 was it split the definition of tax into these
22 Subdivisions "a" and "b" and then it created a hierarchy
23 of tax credits relative to the amount of tax as defined
24 above in Subdivision "a" that could be offset.
25 Now, as I stated a few moments ago, under
26 Subdivision "a", the general definition of tax would
27 only include the corporate income and the corporate
28 franchise taxes. And thus for this taxpayer and with
11
1 respect to these enterprise zone tax credits, the
2 definition of tax would be limited to their corporate
3 income and corporate franchise tax.
4 Then in Section (d)(1) the Legislature enacted
5 the following language. "No credit shall reduce tax
6 below tentative minimum tax except the following five
7 credits."
8 Now I'm aware that the Appellant has stated in
9 some materials submitted last week that there are only
10 four credits, but in fact there was five as Section 17.1
11 of the -- the bill in fact was enacted, and not Section
12 17. I can go into further detail on that if you would
13 like but getting back to the actual language of (d)(1),
14 we can read it again, "No credit shall reduce tax below
15 TMT except" a certain list of credits.
16 Now, as you read this you'll notice that the
17 term "alternative minimum tax" is not used. That's
18 because it's not in the statute and it's not being
19 referred to there.
20 But it does beg the question of what is TMT.
21 And what we know about TMT as it is defined by
22 statute -- this is, by the way, from Exhibit A of my
23 materials that I submitted a few weeks ago -- we begin
24 with the definition -- excuse me, we begin with net
25 income. And to net income we add back certain
26 preference items and make certain adjustments to come up
27 with a base tax amount which we refer to as AMTI.
28 This amount is multiplied by a tax rate. And
12
1 that is what TMT is equal to. AMT, the liability under
2 23400 is not implicated by that definition there. What
3 we have there then is two base amounts. And that is
4 what (d)(1) is referring to.
5 And so, what (d)(1) is providing is that so
6 long as your amount of tax is greater than the TMT then
7 the credits that are available to offset your tax are
8 not limited at all.
9 However, if your TMT amount is greater than
10 this tax amount, then only the listed credits will be
11 available to offset the tax amount.
12 And once again we haven't referenced AMT at all
13 in this statute yet.
14 Now, that makes the list of credits very
15 beneficial because it allows taxpayers to fully offset
16 their tax as defined by 23036. But it doesn't do
17 anything with respect to their AMT liability.
18 Now, in this environment a few years later
19 this -- by the way, this structure still exists today --
20 a few years later in AB 57, AB 57 added credits to the
21 list. That's all it did. It did not change the
22 enterprise zone tax credit statutes to include language
23 that said "these credits will be available against the
24 alternative minimum tax liability under Section 23400."
25 Nothing of the sort.
26 All it did was add credits to the list of
27 (d)(1). Thus there was no change in the law with
28 respect to AMT liability. It was just making enterprise
13
1 zone credits fully available against tax as defined by
2 23036.
3 Now, Appellant's argument is that by adding
4 this enterprise zone credits to (d)(1) in fact it was
5 making those credits available against AMT liability.
6 But that can't be true. And not just because there is
7 an absence of the language in 23036 (d)(1), but also
8 because -- well, I can think of two reasons why.
9 First, because when SB 1801 created that list
10 of credits, the Legislature knew that those credits
11 weren't going to be available to offset AMT. And so did
12 interested taxpayers.
13 How do we know this? Because one of the
14 credits listed under (d)(1) was a solar energy tax
15 credit. This tax credit had previously been available
16 to offset the actual AMT liability. And this credit is
17 rather unique under our code with respect to incentive
18 tax credits.
19 When the bill was going through the process,
20 and this new language and new system under (d)(1) was
21 being created, members of the solar energy industry
22 pointed out that the language was not going to make
23 their solar energy tax credits available to offset the
24 AMT liability.
25 That was a problem because prior to SB 1801
26 they had been available to offset the AMT liability.
27 And so a fix was needed. And as a result we had to
28 change the definition of the tax credit. That's where
14
1 we took care of that problem that they raised. And thus
2 the enterprise zone -- excuse me, the solar energy tax
3 credits were drafted to state specifically that they
4 were available against the AMT under Section 23400.
5 The second reason that we know that the
6 Legislature didn't intend (d)(1) to make those credits
7 offset against AMT liabilities, is that there are two
8 credits listed in there which are not available against
9 the AMT liability. They weren't available against the
10 AMT liability prior to SB 1801 and they weren't
11 available afterwards. I'm specifically referring to the
12 low income housing credit and the ridesharing credit.
13 Neither of those credits have language in their
14 provisions under the credit statutes which allow them
15 against the AMT liability and they weren't available
16 beforehand. Yet they are listed in (d)(1).
17 Thus if we -- if we were to listen to the
18 Appellant's argument apparently SB 1801 was making those
19 available against the AMT liability, as well. When we
20 know that they weren't supposed to. Because SB 1801
21 wasn't supposed to change how credits could be used by
22 taxpayers. It was just changing the system, an
23 organizational system, which was enacted under 1801.
24 It was a bigger plan.
25 Thus when SB -- excuse me, when AB 57 added
26 enterprise zone credits to this list all it was doing
27 was making them fully available against tax. That list
28 does not create the ability to use incentive tax credits
15
1 against their AMT liability.
2 As I note in my opening statement, the issue in
3 this case is whether or not Appellant can offset its AMT
4 liabilities with enterprise zone credits. And I stated
5 that the plain language of the statutes indicate that
6 they may not.
7 When we look at the enterprise zone credit
8 statutes they do not state as the solar energy tax
9 credit stated that they may be available -- they may be
10 used to offset the AMT liability under 23400. They may
11 only be used against tax under 23036.
12 And that definition under Subdivision "a" only
13 includes their corporate income and corporate franchise
14 tax, not their AMT liability.
15 MS. OLSON: Time has expired.
16 MR. GARDNER: Perfect. There are simply no
17 statutory provisions to do so. I'd be happy to answer
18 any questions and we ask the Board sustain the Franchise
19 Tax Board's actions in this matter.
20 MS. YEE: Great. Thank you very much, Mr.
21 Gardner. I'm sure we'll have a lot of questions.
22 Appellants, you have five minutes on
23 rebuttal.
24 MS. MORSE: Thank you. My -- Gail Morse for
25 Nassco. And what the Franchise Tax Board has done is
26 laid out their interpretation of how the credits work.
27 But they've missed a step and it's the critical step
28 that they've missed. Essentially I call it the missing
16
1 link. We've -- we've given to you handouts of the chart
2 that we just uncovered up on the -- up -- up here.
3 And if you'll see, let me -- what the Franchise
4 Tax Board is basically saying is that -- if I stand up
5 and walk over to the Board can you -- will you still be
6 able to hear me, do you think?
7 MS. YEE: Let's give it a try.
8 MS. MORSE: Let me try. Let me just try this
9 really loudly so everybody will pick me up.
10 What the Franchise Tax Board is doing is that
11 they fix the solar energy credit right down here in this
12 corner. And what they miss is this whole fix which took
13 place right here prior to what they're saying was the
14 fix for the solar energy credit.
15 So, let me explain what this chart does. Solar
16 energy credit, the -- the new solar energy credit came
17 in in 1987. And it was adopted -- adopted at the same
18 time as the AMT.
19 And so, when -- when the AMT came into effect,
20 solar energy came into -- came into effect and solar
21 energy credit as first drafted said that it is allowed
22 as a credit against taxes imposed by this part, and at
23 that time "this part" included the AMT because AMT was
24 just added to part 11. And it then said, "Except the
25 minimum franchise tax and the alternative minimum tax."
26 So, when solar energy credit first came into
27 effect in 1987 --
28 DR. CHU: Ms. Morse, do you think maybe we
17
1 could just maybe push one of those microphones so it
2 would be closer.
3 MS. MORSE: Will this go --
4 DR. CHU: Maybe -- maybe Kelly's --
5 MS. YEE: Use Ms. Kelly's, yes.
6 MS. MORSE: Yeah, great. Good. Thanks.
7 So -- so that means that when the solar energy
8 credit came into effect it could not be used against the
9 AMT. That's when the solar energy industry said,
10 "There's a problem, we need to fix it." That's
11 happening here on or about October 1987. The statute
12 that caused the problem was passed in September of 1997.
13 So, you can follow along with the chart that we
14 gave you.
15 So the fix came into effect in Chapter 11 of
16 the 1988 stats. And what they did is they didn't just
17 fix the credit provision, they created a whole new
18 section. They created Section 23630 that specifically
19 says, "We're going to" -- "this is going to be the
20 operative provision to tell you how to use credits."
21 So the first sentence says, "Notwithstanding
22 any provision which allows a credit against taxes
23 imposed by this part," again this part includes the AMTs
24 so it's a fully inclusive definition of tax, "no credit
25 against tax shall be allowed to reduce the taxes imposed
26 by this part," again the AMT, "below the tentative
27 minimum tax, except 23601," which is the prior solar
28 energy credit that expired in '86, "and 23601.4," which
18
1 is the solar energy credit that was just adopted in
2 1987.
3 So, this is the operative provision, not the
4 credit provision. And the credit provision they were
5 consistent because they took the language out. If you
6 see from this box to this box up at the first sentence
7 they basically allow credit against taxes imposed by
8 this part, again includes the AMT and it says, "except
9 the minimum franchise tax," but they took out the
10 additional exception for the alternative minimum tax.
11 So, this is a parallel provision that basically
12 is consistent with the operative provision, which is
13 23630. And -- and if you read this, I mean this says,
14 "notwithstanding any other part in this" -- "in this
15 provision," right. "Notwithstanding any other provision
16 which allows a credit against tax."
17 Well, this is another provision that allows a
18 credit against tax. So these have to be read
19 consistently. Because otherwise this would -- this
20 section would trump the -- the credit provision.
21 So it's 23630 that becomes the operative
22 provision. Then -- so this is the fix. The next -- the
23 next step is to -- is to take SB 1801, which Mr. Gardner
24 referred to, and essentially it's a technical
25 corrections bill as under FTB's own analysis of the
26 bill, and that's when they reformated the whole
27 definition of tax in 230 -- 23036. And they didn't just
28 add (d)(1) at that point. They amended out 23630, added
19
1 the provisions of 23630 into 23 -- into 236 --
2 23036(d)(1), so we get our (d)(1) provision right here.
3 And when they used the term "tax" they were
4 referring to the tax that they -- that 23036 talks
5 about, which is a full definition of tax which is
6 subsections or paragraphs "a" and "b".
7 So, they meant for tax to be given its full
8 meaning as it had been given here and as it had been
9 given down here. And as it had been given over here.
10 And there's no -- there's no support for the Franchise
11 Tax Board's limited reading because what the Franchise
12 Tax Board does is take basically all of the taxes that
13 are listed in "a" & "b" and picks just one of them. And
14 I can show you that.
15 MS. OLSON: Time has expired.
16 MS. MORSE: This is the Chen definition of
17 tax.
18 MS. YEE: Let me stop right here because I have
19 a feeling our questions are going to incorporate some of
20 what you're going to display, since your time has
21 expired.
22 Questions or comments, Members?
23 Dr. Chu.
24 DR. CHU: Well, I'd like to ask the FTB, why
25 would the Legislature have used the word "includes" in
26 both 2330 -- 23036 "a" & "b" if it intended to limit the
27 definition of tax to (a)(1)?
28 MR. GARDNER: The term "includes" was added not
20
1 by SB 1801 but it was actually added several years down
2 the road.
3 As originally drafted, it was drafted as tax
4 means something. Later on, when the language of
5 "includes" was added, you'll notice that -- at that same
6 time that that language was added there was an -- I
7 believe it's (a)(2) which was added which basically says
8 "does not include the following."
9 I believe that is just merely a matter of
10 keeping language consistent with respect to what is in
11 the base definition of -- of tax.
12 And so that's the only reason why I believe
13 that there would have been a change to the word
14 "includes".
15 Am I misunderstanding the question?
16 DR. CHU: Well, it's just that it seems like
17 there would be more specific limitation that would be
18 outlined if -- you know, that would be clear. I think
19 there is some ambiguity here. And in fact, just to go
20 on, the Legislature referenced the definition of
21 tentative minimum tax found in Section 23455 and TMT
22 includes regular tax. If the Legislature had wanted to
23 limit the use of credits to the regular tax component of
24 TMT then wouldn't it have included a reference to the
25 definition of regular tax found in the same statute?
26 MR. GARDNER: No, I don't believe so. I
27 believe that 23036 contains the definition of tax, and
28 it contains it in subdivision "a." And under -- under
21
1 particular circumstances we look to that definition to
2 say what is tax.
3 It's contained within the same statute. So, I
4 don't see why there would be a reference outside of the
5 statute to some other definition.
6 DR. CHU: Well, then there's the legislative
7 history. And I see that there's -- there are many, many
8 references to allowing the -- these credits to reduce
9 AMT.
10 MR. GARDNER: Yes, ma'am.
11 DR. CHU: I mean 18 documents. Do you have a
12 similar kind of history there that supports --
13 MR. GARDNER: Well --
14 DR. CHU: -- a legislative history, that is,
15 that supports your interpretation?
16 MR. GARDNER: Well, I refer to the plain
17 language of the statute. The legislative history is
18 only relevant if there is any ambiguity in the statute.
19 I don't believe there's any ambiguity here in the
20 statute. I think the statute was rather carefully drawn
21 out and that it considers not only the fact that we're
22 not just going to be looking at tax credits when we look
23 to the definition of tax, but that we're going to be
24 using this definition throughout the Revenue and Tax
25 Code, at least for the Bank and Corporations tax.
26 And therefore it was very specific in what it
27 was including. I think I've lost track of your -- your
28 question here.
22
1 But with respect to the legislative history the
2 language I -- that I see in that statute is not
3 technical in nature. And when the drafter of AB 57 is
4 talking about AMT, I'm not so sure that he's actually in
5 fact talking about the AMT liability, but more as this
6 system that was incorporated into California law in
7 1987.
8 And when -- I believe that when people are just
9 talking among themselves and not speaking in technical
10 language, they look at this system and say but for this
11 system what am I paying? And with this system what am I
12 not paying? Or, excuse me, what would I be paying?
13 And that difference is what people really
14 intuitively think of as the AMT.
15 So, in that context I think the language makes
16 sense. What I do note in all of that legislative
17 history and the references that they make is that when
18 they do speak of it technically, they -- they are
19 technically precise. They point out that these credits
20 are being made available to offset the tax when that
21 amount of tax is below TMT. And I think you'll see that
22 in just about all of those references that they're
23 referring to.
24 MS. YEE: Okay. Other questions? Ms. Steel.
25 MS. STEEL: I think you're contradicting your
26 own story here that if there's no ambiguity then why
27 legislative changes there? And they were not really
28 making clear, they want to make clear. That's why they
23
1 are doing it.
2 So, if you say that AMT is not included in the
3 definition of tax, that how can you explain that what is
4 AMT then, at this point?
5 MR. GARDNER: I'm not sure I understand your
6 question, ma'am.
7 MS. STEEL: What is AMT? It's not tax?
8 MR. GARDNER: The AM -- the AMT is a liability
9 defined under 23400. But tax -- depending on what we're
10 talking about with -- in reference to tax may or may not
11 include it.
12 There are times when the definition of tax does
13 include AMT. And we can find out when that is by
14 looking at Subdivision "b" of 23036. There's actually a
15 rather interesting thing that happened back when 1801
16 was passed. The Appellants noted it in page 4 of the
17 materials they submitted last week in response to the
18 Board's questions.
19 And it refers to the fifth credit listed under
20 SB 1801, which is the credit for withheld taxes. The
21 credit for withheld -- they point out that the credit
22 for withheld taxes is -- is also available for AMT.
23 They point that out to argue that that means all the
24 credits in (d)(1) were available against AMT.
25 Now I've already noted there are two credits
26 that weren't. But they're using it as an argument
27 saying, look, look at this statute, that one was
28 available against the AMT, effectively asking why. And
24
1 I think it's a good question.
2 That credit is not like the other credits in
3 one very specific sense. It is not an incentive tax
4 credit. When we give incentive tax credits under the
5 Tax Code, it's effectively an incentive to do a
6 particular behavior, be it invest, be it hire people, be
7 it to locate a business in a particular area. Solar
8 energy. Lots of different things. And those credits
9 are contained in Chapter 3.5 of the Revenue and Tax
10 Code.
11 But if you look at the credit for withheld
12 taxes that's referenced in SB 1801 and was in the
13 original bill and it's still there, you'll notice at
14 least with -- and you'll notice that it is a part of
15 Chapter 23 of the Revenue and Taxation Code.
16 Now, why is that important? Well, when we look
17 to the definition of tax and we see in Subdivision "b"
18 that the definition of tax is expanded for purposes of
19 Chapter 23 --
20 MS. STEEL: What's Chapter 23?
21 MR. GARDNER: Chapter 23 grant -- at the time,
22 give -- that SB 1801 was created, and I'm referring back
23 to that time line -- is the chapter which gives the FTB
24 the authority to order withholding of taxes relative to
25 payment.
26 So, for example, if a bank is paying certain
27 interest charges to another entity, the FTB can say you
28 got -- you have to withhold some amount of tax and remit
25
1 that to the State of California on behalf of that
2 taxpayer.
3 Now, what the definition of tax by expanding it
4 under "b" does is it expands the FTB's authority to
5 require withholding of tax to include that AMT
6 liabilities. That's important. Because when those
7 amounts are withheld the taxpayer gets to use those
8 later.
9 It's like -- it's no different than your
10 employer withholding W-2 on -- on the personal income
11 tax side. Of course you get to use them against your --
12 any of the tax liabilities because that's -- that's what
13 they were withheld for.
14 The same thing happens under 26131. So, I
15 don't think I'm --
16 MS. STEEL: What's 26131? I mean, you know --
17 MR. GARDNER: Yes, ma'am.
18 MS. STEEL: -- you are actually --
19 MR. GARDNER: I'm sorry.
20 MS. STEEL: -- making me confused more than
21 ever. You are just going around and, you know, try to
22 make it like a really big picture. Can you make it very
23 simple state? Can you just make it very simple that
24 what's AMT if it's not tax? Can you just do it one
25 sentence for me, because you going around with --
26 MR. GARDNER: Yes, ma'am.
27 MS. STEEL: -- all these laws and you stated
28 all these different section of the laws. Instead of
26
1 that just give me one sentence.
2 MR. GARDNER: Yes, ma'am.
3 MS. STEEL: That if it's not a tax then what is
4 it?
5 MR. GARDNER: AMT is tax only under the
6 circumstances provided under Subdivision "b" of 23036.
7 MS. STEEL: Then why it's not allowed here?
8 MR. GARDNER: Because the enterprise zone tax
9 credit statutes are not listed under Subdivision "b".
10 MS. STEEL: So you said only listed is
11 corporation income tax or corporate franchise tax?
12 MR. GARDNER: For this taxpayer.
13 MS. STEEL: That's what you said, for this
14 taxpayer.
15 MR. GARDNER: Yes. Yes, ma'am.
16 MS. STEEL: Taxpayer, can you ask -- I mean,
17 can you tell us, you know, how -- this is what --
18 Franchise Tax Board is interpreting only from the
19 statute. You are interpreting under statute with the
20 change, legislative change.
21 Can you explain that, why that was --
22 MR. SPERRING: Yeah, we --
23 MS. STEEL: Just like really simple.
24 MR. SPERRING: It's Nassco's position that the
25 term "tax" is consistent in "a", "b", "c" and "d". And
26 the fact that they use the term "tax" in quotes and it's
27 consistent, they are picking up the broad definition of
28 tax.
27
1 We note later on in -- in the statute when they
2 want to talk about regular tax, they do. So, and -- and
3 the point was well made by Board Member Chu when they
4 want to reference a statute like tentative minimum tax,
5 they reference it.
6 So -- in (d)(1). So, if they wanted to limit
7 tax to "b" -- to "a" as the FTB is indicating, by all
8 means they would have referenced that. As they have
9 done later on in the Code.
10 So, to us it's -- clearly tax, it's consistent
11 "a" and "b", "c" and "d", it's the same definition of
12 tax. And we don't see any language that would limit it
13 to just "a".
14 MS. STEEL: Thank you.
15 MS. YEE: Other questions or comments, Members?
16 I have a few.
17 I'm having difficulty looking at the cumulative
18 application of Subdivisions "a" and "b" under 23036
19 because I do think there are qualifiers in Subdivision
20 "b" that speak to when tax includes the alternative
21 minimum tax.
22 But let's put that aside for now. I guess my
23 first question is with respect to the fixes that were
24 done that's displayed in your chart, and in the exhibit
25 that you have before us. And I guess a question for the
26 Franchise Tax Board, your contention is that the fix as
27 it relates to the solar credit being able to directly
28 offset AMT is what's reflected in that bottom part of
28
1 the chart. What's your sense of what the interaction is
2 between, I guess, that third column, the top and bottom
3 part of the -- that third column? Because they were --
4 both revisions look like they were contained in the same
5 bill and -- because there were so many sections in the
6 bill it suggests to me it may have been a conformity
7 bill or some sort of a -- some sort of an overall fix
8 bill that just tried to clean up the statutes.
9 But your sense of whether there was a
10 relationship between what took place in Section 54 and
11 Section 52.
12 MR. GARDNER: Well, I think my answer -- an
13 answer to that question would be really difficult
14 because what I think of when I see 23630 and the other
15 statutes that were enacted by Chapter 11 is I think
16 about repealed statutes. Because all of this stuff was
17 repealed by SB 1801.
18 This language was gone and so how are -- how
19 are we supposed to -- why would we look to the language
20 of stuff that the Legislature got rid of when
21 interpreting the plain meaning of the statutes?
22 What I see was that when California first
23 started this adoption -- a broad adoption back in '87
24 and '88 of provisions of the Internal Revenue Code, that
25 we had to come up with the means of adopting that. And
26 that first attempt is reflected in this Chapter 11 and
27 including 23630.
28 The legislature decided that that method and
29
1 that system wasn't going to work. And that's why they
2 repealed it. They came up with a different system and
3 that system is reflected in SB 1801. And all of the new
4 definitions and all the different terms and all of the
5 things that were changed to the credit statutes,
6 themselves, are a reflection of that desire to have a
7 different system.
8 So, that's what I think about when I see --
9 when I look at this stuff, this language. And so for me
10 to say that, you know, was this a fix, was this some
11 other thing, what I think of is that 1801 was not going
12 to change the manner in which credits could be used by
13 an individual on -- from before or after.
14 What the taxpayer is saying that -- is look at
15 (d)(1). There are credits listed there, including the
16 solar energy credits, which we know were available to
17 offset AMT liability. And they're basically saying
18 because they're in (d)(1), (d)(1) was the reason why --
19 is the reason how the -- the Legislature did this.
20 Well, that's sort of wagging the dog. They're
21 stating, look there, it's in that statute. Therefore
22 that caused it. There is a correlation. Certainly
23 those credits were available to -- to offset AMT
24 liabilities. But that doesn't mean that being listed in
25 (d)(1) is now where that authority is.
26 That's exactly why the members of the solar
27 energy industry looked at the statute back in August of
28 1988, when the (d)(1) language was already proposed but
30
1 the credit language for the solar energy credits didn't
2 have that extra language in it.
3 And that's they've contacted the Legislature
4 and the FTB and said, "That language has to be changed.
5 We need to get something in there so that these solar
6 energy credits, which were available to offset AMT prior
7 to 1801, will be available after SB 1801."
8 MS. MANDEL: You -- you said '88. Did you mean
9 '87?
10 MR. GARDNER: For which?
11 MS. MANDEL: For when the solar energy people
12 looked at something and made contact.
13 MR. GARDNER: Well, they con --
14 MS. MANDEL: The letters in your --
15 MS. YEE: The letter was in '87.
16 MS. MANDEL: -- Exhibit A -- are '87.
17 MR. GARDNER: Well, they were talking about it
18 in '87 back when this Chapter 11 was going on.
19 MS. MANDEL: Okay.
20 MR. GARDNER: But then we have this fix -- we
21 get -- we were getting rid of that untold system under
22 Chapter 11 and adopting the system under SB 1801.
23 Right?
24 And when that system was going through the
25 legislative process, they were looking at all these
26 various changes all over the place and they were looking
27 at (d)(1) and reading its plain language, and they said
28 "(d)(1) doesn't give us our credits against the AMT
31
1 liability." And they were right. And that's why in
2 late August of 1988 the solar energy tax credits had
3 language added to the credit statute to say specifically
4 these will be available not just against the tax as
5 defined by 23036, but -- but in addition the AMT tax
6 under 23400. That's why that language is so important.
7 That's why I believe that if the Legislature
8 wanted the enterprise zone credits to specifically apply
9 against the AMT liability of 23400, they would have
10 changed the enterprise zone tax credit statutes,
11 themselves.
12 MS. YEE: Let me follow on a question. This is
13 a difficult case for me because I certainly respect
14 Nassco and certainly -- and the prominence it has in the
15 San Diego region as an employer, and certainly as a
16 well-intentioned employer in trying to avail themselves
17 of the -- certainly the incentives that are there to put
18 people to work.
19 What I am also troubled by is the references
20 not only in the bill analysis but I think throughout I
21 think the legislative history that we've seen actually
22 from both sides, that the -- that AB 57 was -- the
23 purpose of it was to permit the application of the
24 credits to -- in computing the AMT, which is different
25 than directly offsetting the AMT.
26 But I guess I'm -- I've -- I'm still stuck at
27 the bottom line being -- permitting it to -- permitting
28 the credits to reduce regular tax bill over the
32
1 tentative minimum tax.
2 And I guess if -- if -- and maybe this is a
3 question for both sides, but what benefit would Nassco
4 have obtained from a bill that would have just allowed
5 the credits to reduce regular below TMT if they were an
6 AMT taxpayer only?
7 MR. SPERRING: Jim, why don't you speak to
8 that.
9 MR. EUPHRAT: Right. Well, under the FTB's
10 interpretation of -- of the rules, if -- if we are
11 strictly an AMT taxpayer, the FTB has argued, you know,
12 and the auditor who initially raised this issue with me
13 stated that because we didn't have any regular tax
14 essentially we get no benefits from the credits then.
15 That's -- that's their -- that was their position
16 stated.
17 MS. YEE: Okay. Franchise Tax Board, do they
18 get any benefit from the credits if they're only an AMT
19 taxpayer?
20 MR. GARDNER: Right. By -- I'm assuming that
21 by -- you mean by AMT taxpayer that their tax --
22 corporate income tax or corporate franchise tax is zero
23 or effectively the minimum tax for -- for such a
24 corporation.
25 Under such circumstance, their tax is already
26 zero. Now, will they -- does that mean they will never
27 have a benefit? No. They may have a benefit in the
28 future, but currently they wouldn't be -- they would --
33
1 those credits wouldn't be available to offset anything
2 because their tax is already at zero.
3 MR. SPERRING: I'd like to speak to that --
4 MS. YEE: Mr. Sperring.
5 MR. SPERRING: -- if I could.
6 And I'll show a demonstrative --
7 MS. MANDEL: Can you back up, Jon, because I'm
8 having trouble hearing you.
9 MR. SPERRING: Sure. Here, let me just grab a
10 mike.
11 MS. MORSE: Here, I'll do it.
12 MR. SPERRING: When the Franchise Tax Board
13 talks about effectively going to zero, okay, in regular
14 tax, the important thing to keep in mind is that the TMT
15 level remains there. Okay.
16 So, the way the Franchise Tax Board has
17 interpreted the Code, a taxpayer whose regular tax
18 exceeds their TMT gets to go all the way down to the
19 $800. Okay. No matter how large the TMT is, how high
20 up, all the way to the ceiling, they get to go all the
21 way down to $800.
22 This benefits every taxpayer that has the
23 enterprise zone credits that are not in AMT. FTB has
24 given this wide benefit to every taxpayer that has the
25 credits to satisfy it.
26 Now, if you have a taxpayer that is supposedly
27 in AMT land and let's say all the way down to 800, what
28 happens is this whole amount becomes AMT. They pay this
34
1 total amount. It's not considered regular tax, it's
2 considered AMT.
3 Under that situation, okay, for the AMT
4 taxpayers they're going to have this $40 that they
5 cannot offset against the credit.
6 So in this perverse, you know, read of the
7 statute, okay, any taxpayer that is at -- all taxpayers
8 are going to be at the TMT. If they have a TMT they're
9 all going to be there. But you have two types.
10 They're either there because their regular tax
11 exceeds it or they're there because they're AMT. And
12 so, under the -- because, remember, the AMT is the
13 difference between your regular tax and your TMT. So if
14 your regular tax is zero, all this becomes AMT. If your
15 regular tax is 20 bucks, then your AMT is 20 to get you
16 up to 40.
17 So under the FTB's read of the statute everyone
18 gets to go to minimum tax except those who are in AMT.
19 And the great irony is when you look through the
20 legislative history you see three people. In fact, a
21 former prominent staffer told me this was known as a
22 Taco Bell bill. Okay.
23 And why? Okay, because these -- these three
24 entities were in AMT. They were subject to the AMT. In
25 other words, they're very unique taxpayers. They didn't
26 have the regular tax, but they had to pay AMT to their
27 tentative minimum tax.
28 And so now because they don't have any regular
35
1 tax to offset, okay, they're not allowed to use the
2 credits, and so they're going to pay the full $40.
3 And I have other -- I'll give you other
4 demonstratives, I'll show you just how crazy and random
5 the way they've interpreted the Code is.
6 MS. YEE: Actually, before you -- Franchise Tax
7 Board, do you have any response to that description?
8 MR. GARDNER: Well, I'm just noting it's just a
9 little difficult to follow some of that, the fact
10 pattern. I think that -- it works better with, you
11 know, actual concrete examples of what -- what happens,
12 but --
13 MS. YEE: All right, okay.
14 MR. SPERRING: So, the way FTB has interpreted
15 Code, a taxpayer with $39 of regular tax and a TMT of
16 $40 would get to offset $39. And the one dollar would
17 be -- they'd have to pay. No offset. That would be
18 AMT.
19 MS. MANDEL: Because -- because the $1 is
20 AMT.
21 MR. SPERRING: Exactly. Exactly. Now, if --
22 and, again, you know, you have to ask yourself, well,
23 why is your regular tax below TMT? Well, the only
24 reason why your regular tax would be below TMT is you
25 have preference items -- these are generally good things
26 like deductions, investing in capital. In our case we
27 have deferred -- deferred gain.
28 So -- so these deductions push our regular tax
36
1 below the magic TMT line. Right?
2 So -- so here if you just pushed it below a
3 buck you're only going to pay a dollar tax above your
4 minimum tax, right, because that's the AMT. But if you
5 have a lot more deductions, you get to push it all the
6 way down to let's say $1, guess what the FTB has
7 enacted? Now if it's one dollar, okay, then you --
8 MS. MANDEL: $1 what?
9 MR. SPERRING: Of regular tax, excuse me.
10 Yeah, if $1 of regular tax they say, okay, we get to
11 offset that, but the whole 39 you don't.
12 So, again, you know, they say in their brief
13 that there's this magic TMT line that we should never go
14 below, that that -- every taxpayer has to pay that.
15 Well, they've interpreted the Code that
16 basically everyone -- very few taxpayers are AMT in the
17 corporate world. So the way they've interpreted it
18 everyone gets to go below the magic line except the poor
19 three, okay, Nassco, Unity Products and Taco Bell.
20 They're out of luck.
21 And it's reflected not only in the author's
22 statement in the analysis, but also in the
23 revenue estimate of the bill. It was only a $3 million
24 revenue estimate on the bill. Nassco is several hundred
25 thousand in tax of that.
26 So, if you make -- you know, sense, it's a very
27 small bit of companies. Yet, again, they've interpreted
28 it -- I'm sure the revenue estimates is much larger or
37
1 it was under what -- the true beneficiaries because,
2 again, they've interpreted it in such a way everyone
3 benefits but the poor few who happen to be in AMT.
4 MS. YEE: Franchise Tax Board, any additional
5 comments?
6 MR. GARDNER: Well, I think what -- in terms of
7 the calculations and things of that nature, I think
8 that's an accurate -- what he said is an accurate
9 statement.
10 In terms of the manner in which he's stating
11 that -- that we're interpreting it is -- is accurate
12 in -- in those respects. And we believe it's because
13 that's what the statute provides.
14 If -- I -- what I hear from him saying is that
15 the policy of -- behind that, behind this -- these rules
16 is not a good policy. That may be true. But that
17 policy should be dictated by the Legislature and in a
18 legislative fix.
19 Currently the statutes read as I've already
20 gone into on a couple of occasions. It may be perceived
21 as unfair to a taxpayer that has already reduced its tax
22 to zero and has a TMT number that's very, very high.
23 But that's what the Legislature did.
24 MS. YEE: Okay. Let me just pose a question to
25 Appeals. Have you had an opportunity to reconcile all
26 of these statutory changes as been presented in terms of
27 the legislative history on both the definition of tax as
28 well as the solar credit?
38
1 MS. KELLY: I've been through them quickly.
2 MS. YEE: Okay. I'm -- I don't want to -- this
3 is going to sound derogatory but it's not meant to be,
4 but because these statutes are quite dated at this point
5 in time I don't have a -- I personally don't have a good
6 handle on how to look at them in context. And -- and I
7 do think fundamentally this is an issue of statutory
8 construction and I, as I said earlier, am not supportive
9 of the interpretation with respect to the cumulative
10 application of Subdivisions "a" and "b" of 23036.
11 But at the same time looking at the legislative
12 evolution and given what I believe these bills were
13 intended to do, I just don't want to be in a position of
14 reading more meaning into it if that was in fact not
15 intended to be.
16 But looking at the plain statute as enacted by
17 AB 57, I do think that certainly looking at the language
18 and I think -- and I know that as people talk about
19 bills and what bills do, it certainly was intended to
20 create a benefit as related in some aspect to the
21 alternative minimum tax. But my read of the statute is
22 that it was not intended to be a direct offset against
23 AMT.
24 Certainly as you look at how the whole -- the
25 entire construct of -- of Section 23036 and its
26 subdivisions I'm having a hard time piecing those
27 together as having alternative minimum tax be part of
28 the entire definition of tax. So -- and the fact that
39
1 it could have referenced 23400 if it were intended to be
2 applied against AMT in that particular statute, in
3 23036.
4 So, that's where I am and I just don't know if
5 Members -- there's a desire to look at perhaps having
6 Appeals go back and work and try to bring back a clearer
7 legislative history and -- and also intent in terms of
8 what these various changes were intended to do.
9 And I don't know, Ms. Kelly, if you've had a
10 chance to do that or if you feel that would be helpful.
11 MS. KELLY: I think it may be helpful. At this
12 point it appears that a plain reading of the statutes
13 supports FTB's position. I think it might be
14 Appellant's position that that's correct, but it's wrong
15 based on what was intended when AB 57 was enacted. No?
16 MS. MORSE: No.
17 MS. KELLY: I'm sorry.
18 MS. MORSE: Could I just speak to that one --
19 MS. YEE: Yes.
20 MS. MORSE: -- because it goes back to the
21 chart. I mean, the -- the fix is really in Chapter 11
22 because contrary to what the FTB is saying, FTB is
23 saying that (d)(1) --
24 MS. YEE: The -- the fix on the issue of tax.
25 MS. MORSE: On the solar energy credit.
26 MS. YEE: Okay.
27 MS. MORSE: Okay, so the whole issue here is we
28 fix the solar energy credit --
40
1 MS. YEE: Yes.
2 MS. MORSE: -- and -- and we should have same
3 treatment for the rest of the credits. And the fix to
4 the solar energy credit was to create the special
5 provision -- specific provision, which is 23630. And it
6 has exactly the same language. And that language says,
7 "Notwithstanding any provision which allows a credit
8 against the taxes imposed" -- "imposed by this part, no
9 credit against tax shall allowed to reduce taxes imposed
10 by this part below the TMT except 23601 and 23694."
11 Those are both --
12 MS. YEE: And that's --
13 MS. MORSE: -- the solar energy credit.
14 MS. YEE: But it's that parenthetical with the
15 exceptions that seems counter to your main argument
16 about what the whole section was trying to do.
17 MS. MORSE: No, no, because what it does is
18 it -- what it says, "reduced taxes imposed by this
19 part." Taxes imposed by this part right there includes
20 the TMT because they hadn't revised the definition of
21 "tax" yet to include -- in the 236 -- 23036 provisions.
22 So, what they did is they -- this is the
23 operative provision, 23630, says you get to reduce taxes
24 imposed by this part, which is a total fulsome
25 cumulative reading of the definition of -- of tax.
26 Except these provisions, right.
27 MS. KELLY: Can I clarify? Because I thought
28 previously you said that "by this part" included AMT.
41
1 MS. MORSE: It does because --
2 MS. KELLY: Under Chapter 11.
3 MS. MORSE: Right. Because this part --
4 MS. KELLY: Not TMT. AMT.
5 MS. MORSE: It includes AMT, right.
6 MS. KELLY: Okay, good. Thanks. That's what I
7 thought that you said.
8 MS. MORSE: It includes AMT. I'm -- did I
9 say -- I'm sorry.
10 MS. KELLY: Yeah, you said TMT.
11 I think it might be helpful for FTB to address
12 that argument because, you know, Appellant is saying
13 that this language was incorporated in (d)(1) and I
14 don't think FTB has addressed that directly.
15 MS. MORSE: Because they say -- because FTB
16 says that (d)(1) came into effect by Chapter 1465 and it
17 didn't. It -- it existed before 1465. It existed --
18 existed in Chapter 11.
19 And so, somebody had already thought through
20 how these credits were going to work. The Legislature
21 had already thought through it all when they adopted
22 23630.
23 And then what they did is they just took what
24 they thought was the fix and move it over to a technical
25 correction, which was just to revamp the definition --
26 the definitional section and to -- to move it around. I
27 mean, we -- we clearly don't know what was in
28 everybody's mind, but I mean it's very clear from just
42
1 the evolution of the statute that the fix happened well
2 before the Franchise Tax Board is saying that it did.
3 And the fix, even by the language of the statute, that
4 fix can't happen in the credit section itself because
5 the language says "notwithstanding any other provision."
6 That basically says, "I'm the operative
7 provision," and that's -- and that's our position. I
8 mean, it's very clear. We think it's clear from the
9 plain reading of the statute and that plain reading is
10 supported by this evolution.
11 And that's -- I'll shut up now. I get very
12 passionate about this.
13 MS. YEE: Franchise Tax Board, do --
14 MR. GARDNER: Well --
15 MS. YEE: -- have you had an opportunity -- I
16 mean, I don't know if you've had an opportunity to look
17 at how we reconcile --
18 MR. GARDNER: Well, my answer doesn't change
19 from the answer I gave earlier.
20 MS. YEE: All right.
21 MR. GARDNER: It -- this -- 23630 was repealed.
22 It was a part of the system that was repealed by all
23 of -- all of which was repealed under SB 1801 and a
24 different system was put in place.
25 I don't see why we should go back and look at
26 the manner -- the system that we got rid of to define
27 what specific statutes underneath the new plan should be
28 interpreted as. I think that we should look at them,
43
1 read them in their plain language and apply them.
2 MS. MORSE: One more point. I mean, just --
3 the system that we're getting rid of was the system that
4 came into place to fix the solar energy credit. So
5 you're -- the Franchise Tax Board is pointing to the fix
6 to the solar energy credit to support their position,
7 yet ignoring the fix that actually happened.
8 And that system was in place --
9 MS. YEE: Well, there's two different fixes.
10 So --
11 MS. MORSE: No, it's consistent fix. In our
12 interpretation --
13 MS. YEE: In your view, right.
14 MS. MORSE: -- it's a consistent fix.
15 MS. YEE: Okay.
16 MS. MORSE: And that whatever -- and so what
17 they did, you know, in Chapter 1465 was -- was merely a
18 technical correction.
19 You know, we all know that technical
20 corrections are not substantive, right? So there was no
21 substantive change.
22 So whatever -- whatever they did between the
23 third box and the fourth box, which is laid out in -- in
24 the language of the statute, was simply a technical
25 correction.
26 And -- and the system was the same system that
27 existed prior. That was a system that was -- this
28 system was what the Legislature put together to fix --
44
1 to create the fix that everybody wanted.
2 And so by doing that they created this
3 operative part of the statute that says, okay, we're --
4 there's going to be some credits as -- as laid out in
5 the legislative history that are going to be, you know,
6 so important that we're going to give them special
7 treatment. And this is the provision that they created
8 to give those credits that treatment. Not the credit
9 language themselves.
10 MS. YEE: Okay. So under your interpretation
11 if we -- to the extent that we uphold your position,
12 basically every credit that's listed under Subdivision
13 "d" would be able to be applied to offset AMT?
14 MS. MORSE: That's correct.
15 MS. YEE: Okay. And the Franchise Tax Board,
16 you are not of that view?
17 MR. GARDNER: We don't agree with that
18 statutory interpretation. I think that if you find --
19 if you rule that -- because the enterprise zone credits
20 were listed under (d)(1) I think you would have to find
21 that all those credits forever -- any credit listed
22 under (d)(1) would also be available.
23 That would be consistent --
24 MS. YEE: Right.
25 MR. GARDNER: -- with that type of holding.
26 MS. YEE: Okay. Other questions or comments,
27 Members?
28 Mr. Leonard
45
1 MR. LEONARD: I -- your question about the --
2 the statutory interpretation, the history, just struck
3 me back to Franchise Tax Board. I -- I was ready to
4 concede the point that the law is confusing, and you
5 seem to say it's crystal clear, and I just don't see
6 that. I think the very dispute we have, questions
7 raised by Board Members and by staff, reflect the fact
8 it isn't clear.
9 It -- and I'm -- I'm well aware that it's a
10 quick and dirty way in legislation to put in
11 "notwithstanding" and let somebody else later figure out
12 is that notwithstanding the -- the Business and
13 Professions Code, the Revenue and Taxation -- you know,
14 how -- what do you not withstand, rather than say what
15 you intend to do.
16 And I have a memory of the bill. It was the
17 Taco Bell bill. And -- and without violating our
18 privacy laws, it does seem to me that if the other two
19 companies that were advertised as beneficiaries of this
20 and admitted they had a tax issue, that they would be
21 unable to take advantage of the enterprise zone credits
22 because of their particular tax situation -- I'm
23 assuming they got them. I'm assuming Franchise Tax
24 Board gave them or they were somehow satisfied.
25 Because they're not here. It's eight years
26 later from the last tax year for this taxpayer and we're
27 talking a -- a fix or the clarification put in '87.
28 So, I think we're in -- in a situation without
46
1 knowing it, of -- of treating taxpayers similarly
2 situated differently and will never be able to know
3 unless taxpayers themselves, I guess, voluntarily come
4 forward, to -- to deal with this.
5 So, given all that confusion, I -- I suggest we
6 do look at the legislative history, which is back to
7 your question, is there anything in the legislative
8 history not before us. I don't think there is, at least
9 the -- the volume of information I've gotten squares
10 with my memory of the intent of the bill was as
11 advertised every step of the way through the process.
12 MS. YEE: Other questions or comments, Members?
13 Okay, hearing none, is there a motion?
14 DR. CHU: Move to take the matter under
15 submission.
16 MS. YEE: Motion by Dr. Chu to take this matter
17 under submission. Is there a second?
18 MS. STEEL: Second.
19 MS. YEE: Second by Ms. Steel.
20 Without objection, that motion carries.
21 Thank you all very much.
22 We will discuss your matter later today and
23 send you notice of our decision.
24 Thank you.
25 ---oOo---
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1 REPORTER'S CERTIFICATE.
2
3 State of California )
4 ) ss
5 County of Sacramento )
6
7 I, BEVERLY D. TOMS, Hearing Reporter for the
8 California State Board of Equalization certify that on
9 February 25, 2009 I recorded verbatim, in shorthand, to
10 the best of my ability, the proceedings in the
11 above-entitled hearing; that I transcribed the shorthand
12 writing into typewriting; and that the preceding 48
13 pages constitute a complete and accurate transcription
14 of the shorthand writing.
15
16 Dated: March 25, 2009.
17
18
19
20 ____________________________
21 BEVERLY D. TOMS
22 Hearing Reporter
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